By Yahile Ning
Prediction consists of three basic factors: specific markets, expiration dates, and probability. While clearly describing the specific object and requirements of a prediction, the specific “market” conveys different positions(sides) for users to choose from. The expiration date specifies the end time of this prediction market, which is usually close to the date described in the specific event. Probability refers to the user’s deterministic intuition of different positions(sides) of a specific event or the probability of occurrence represented by the historical frequency of the same situation.
Decentralized Prediction Markets (DPMs) emerged as early as 2012 with its first work Satoshi Dice created on the BTC chain. Since the US general election in September 2020, Ethereum applications related to prediction markets have truly become known to a wider public. Regarded as a track that cannot be ignored, DPMs firstly appeared on the blog written by Vitalik Buterin: Prediction Markets: Tales from the Election. In the article, Vitalik reviewed his personal experience of using the prediction market product Augur to “bet” on the results of the election. He also publicly explained the view that prediction markets will become an increasingly important Ethereum application, and even praised it as “one of the most valuable Ethereum applications”.
At present, products in prediction markets are still relatively niche and in their infancy. And people’s views on this track vary from person to person. However, we believe that the future of the prediction markets is of great potential. This article will talk about the characteristics of the decentralized prediction markets, analyze the current development of the prediction markets in combination with data, compare the ecological protocols existing in prediction markets, focus on some innovative products, and finally discuss many possibilities in the future.
Traditional Prediction Markets VS. Decentralized Prediction Markets
Scenarios of betting on future predictions are everywhere. As a class of “user-friendly” applications, what problems do the decentralized prediction platforms solve compared to traditional prediction products?
No Centralized Operators
The logic of prediction plus betting is implicit in lotteries, insurance, and even gambling. However, the outcome of events in such scenarios was often as “random” as a roll of the dice in the past. Everyone who buys a lottery ticket does so with a “try it out” mentality. So, who are users gambling with when making a bet? Behind the winning or losing, it is all about someone who has the final say, and this “someone” is the centralized operator. Using blockchain technology, decentralized prediction market platforms can effectively discard centralized operators and servers while using cryptocurrencies to create a global and open market.
Information on Chain
For prediction markets projects based on financial profit demand, the most important step is to build a transparent, safe and uncheatable platform for users. Blockchain technology enjoys a natural advantage in this regard. With data and information on the chain, blockchain technology can protect the rights and interests of participants to the greatest extent. At the same time, the outcomes of many events rely on oracle price feeds and traditional news outlets to make decisions, with different mechanisms for incentives and dispute window periods set. This offers the decentralized prediction markets the privilege to cross the threshold of trust of users.
Rich Revenue Models
Like the decentralized prediction markets, the traditional prediction markets are also all-embracing, covering politics, economy, sports, culture, entertainment and other fields. However, the decentralized prediction platforms are better in terms of revenue models. When buying lottery tickets or gambling, there is only one way to participate, that is you buy to bet. It is often a black-and-white result. While the decentralized prediction markets have made more attempts, making traders or liquidity providers have opportunities for profits. Traditionally, users we discuss here are those who are interested in a certain event and willing to spend time to make judgments and speculations while locking a certain amount of funds to bet on a result. But each step in the whole process may stop some potential users. However, the emerging prediction market products allow users to trade on the outcome of a certain event while also supporting them to obtain rewards by creating events, holding options, providing liquidity, and reporting on the outcome of the event.
Ⅰ Market Data
The possibilities of prediction markets are as colorful as human imagination. The pioneer of the decentralized prediction markets started research and development based on the Ethereum chain — Augur back in 2014. Gnosis appeared in 2015, building infrastructure for latecomers such as PolyMarket. The on-chain prediction markets received widespread attention during the 2020 U.S. presidential election. In the same year, multiple DPM protocols appeared and the on-chain prediction markets ushered in historical user participation and discussion with the opportunity of the election. In addition, the DeFi boom in 2020 stimulated the innovation of prediction protocols: either the introduction of the AMM mechanism, or the development of Layer 2 and so on. Besides, we also found that other tracks start containing prediction ideas, such as Options launched by the derivatives protocol Charm Finance.
This report analyzes the historical data of five main prediction protocols on the market to observe the operations of DPMs, including Omen, Augur V2, PlotX v2 and Charm Options. Charm Options is a derivatives tool, but considering its predictive features, we will still discuss it here. The historical time range is from the launch of each protocol to July 5, 2021. Among the five protocols, Omen covers its data on xDAI, Augur only focuses on its V2, and PlotX is limited to data from May 31, 2021 for no access rights. The following is a historical data chart produced based on the obtained transaction volume of each prediction protocol. According to the chart, there are obvious three steps in the historical development of the prediction markets. Specifically, the prediction markets stayed inactive before the beginning of the DeFi boom in 2020. After the DeFi boom started, the prediction markets welcomed the most active trading state in history. The daily trading volume of multiple prediction protocols such as Omen and Augur V2 has refreshed their historical records a dozen times. The latecomer Polymarket is surprisingly the only protocol with daily trading volume exceeding one million dollars. However, the overall prediction markets have cooled down significantly since 2021 begins.
Polymarket accounts for approximately 90% of the total historical total transaction volume of the overall prediction markets while Augur V2, Charm Options and Omen (including xDAI chain) share less than 5%. Although the total volume of the three protocols is approximately the same level, the daily transaction volume varies due to different launch dates. Omen (including xDAI chain) was the first to go online, but the average daily transaction volume was only $15,000; Augur V2 and Charm Option went online in a short time, but the average daily transaction volume reached around $35,000. Polymarket’s average daily transaction volume was as high as $470,000 due to the fact thst its daily transaction volume has exceeded $ 1M for many times.
This article specifically analyzes the prediction markets on Polymarket. As of July 8, Polymarket prediction platform has opened a total of 682 prediction markets since its launch, of which 617 have been closed, and 65 markets are still active. The closed prediction markets have pooled a total of $90,100 in liquidity and generated a transaction volume of $124 million. In addition, we find that there are a total of 51 closed prediction markets on the platform related to Trump and Biden, accounting for about 8% of the total number of platforms and 7% pooled liquidity of the total platforms. However, the transaction volume data shows that the liquidity related to Trump and Biden has created as high as about 60% of the platform’s transaction volume.
Ⅱ Prediction Market Ecological Protocols
Augur: Supporting Limit Orders
Background and Introduction
Augur is mainly developed by Forecast Foundation, the non-profit organization. Joey Krug, the co-founder of Augur, is meanwhile the co-founder of Forecast Foundation and the co-CIO of Pantera. Pantera Capital was established in 2003. Pantera had become the first institutional asset management company in the United States to invest exclusively in blockchain technology and digital assets when BTC was only at $65/BTC in 2013. The firm subsequently launched the first blockchain-focused venture fund. Pantera BTC fund has risen 82,000% since its inception. Augur, supported by Pantera, is one of the first decentralized applications built on Ethereum, which carried out an ICO in June 2015 with its Reputation token (REP).
On Augur, users can create accounts with their emails or wallets, and use DAI to pay for betting (ETH pays for handling fees) on politics, economics, sports, entertainment, medical and more. Augur’s Betting product adopts the order book model plus decentralized oracle Ox. The biggest feature of the platform is the design of a decentralized reporting pool, which adds economic incentives and dispute window periods. Holders of REP can report on the results of events in the Augur prediction market and receive incentives. In the newly released roadmap, the Augur team announced that it will connect with Balancer v2 AMM to provide scenarios with more liquidity incentive and support layer 2 and limit orders.
GnosisDAO: Building Infrastructure for Latecomers
Background and Introduction
GnosisDAO is originally a prediction markets-driven collective, stewarding the Gnosis ecosystem through Futarchy: governance of prediction markets. As one of the Ethereum projects incubated by Consensys, Gnosis was launched by Martin Köppelmann (CEO) and Stefan George (CTO). Its advisory board includes Vitalik Buterin, co-creator of Ethereum, and Joseph Lubin, founder of ConsenSys. Vitalik Buterin has also been talking about the potential of Futarchy on his blog.
The outstanding contribution of the Gnosis team is that they have launched CTF (Conditional Tokens Framework) and Apollo (Prediction Market CMS) successively. It can be said that without the infrastructure built by Gnosis, there would be no latecomers such as Polymarket, Omen, and Corona Information Markets. In fact, two other platforms, Helena and Corona Information Markets, have been established based on Gnosis in 2019. Among them, Corona focuses on COVID-19 related topics. However, since these two projects have ceased operations after July 2020, we will not introduce them here.
Futarchy is a form of governance logic, which can be used in a community, blockchain, or even country. In “Futarchy”, people can vote values, but bet beliefs. In addition to the governance logic, Gnosis also allows anyone to build a prediction markets product, which is a function open to administrators only in other projects. Therefore, in the decentralized prediction markets track, the Gnosis ecosystem has acted somehow as an important incubator.
PolyMarket：The Leading Protocol with a Total Volume Exceeded $1 Billion
Background and Introduction
Polymarket was launched by Shayne Coplan in June 2020. On October 19, 2020, Polymarket released its Beta version and closed a $4 million funding round by Polychain Capital. And the round was joined by some of the industry’s most well-known advocates and investors such as former AngelList CEO Naval Ravikant. It is worth noting that the entrepreneurial force, Balaji Srinivasan, Meltem Demirors, Compound’s Robert Leshner, Aave’s Stani Kulechov, Synthetix’s Kain Warwick, major cryptocurrency VC ParaFi, 1confirmation, Tarun Chitra, Kal Vepuri, Josh Hannah, Marc Bhargava, Samir Vasavada and Calvin Liu, all participated in the round.
Although Polymarket is a latecomer of the prediction markets, it has won a lot of attention after its launch. Currently deployed on the Ethereum sidechain — Polygon (Matic), users in Polymarket need to purchase USDC with a credit card or recharge USDC from their wallets to a Polymarket account created by their emails, and they need to consume a certain amount of ETH to pay for Gas. Polymarket uses an AMM (automated market maker) model, and a 2% fee will be deducted for all transactions and provided to liquidity providers. The method of email login plus credit card betting has lowered the threshold for ordinary people. And a frictionless user experience and holistic information portal has led to excellent community feedback. As of the publication of this article, Polymarket is still the prediction platform with the largest transaction scale among similar products, with a total transaction volume of more than $137 million.
Omen: Achieving Cross-Platform Mobility and Interoperability
Background and Introduction
In February 2020, DXdao built Omen on CTF, a conditional token framework developed by Gnosis for prediction markets.
Anyone can create a predictive event based on any issue (including, but not limited to, technology, cryptocurrency and politics), while customizing the outcome token, the initial probability as collaterals, the decision day and the oracle. Event outcomes use Realit.io and Kleros as arbiters (Omen v1, which may integrate Chainlink, Aragon Court and traditional news organizations in the future). The fixed product AMM (FPMM) creates a liquidity pool similar to Uniswap. Because conditional tokens are based on the ERC-1155 standard and can be packaged as Ethereum’s ERC-20 tokens, tokens created on Omen can be traded on external decentralized exchanges such as the Gnosis Protocol soon. This feature not only gives prediction market assets better access to the global liquidity pool, but also enables cross-platform interoperability between different prediction market providers such as Omen or Polymarket.
In February 2021, Omen officially landed on xDai. Low gas fees reduce the cost of user participation, and both the ETH mainnet’s and xDai network’s tokens can be used on Omen. However, based on current data, xDai network has relatively weaker influence. As of July 5, 2021, the total transaction volume of Omen is about $6.4m, of which xDai network only contributes $130k.
Charm: Prediction + Options
Background and Introduction
Charm is generally considered to be a decentralized option agreement based on Ethereum. The project started in 2020 and was officially launched on the mainnet on January 18, 2021. Charm aims to provide users with European call and put options and uses the prediction market AMM to create liquidity. But providing liquidity in Charm Options is more a forecast of the future, or even a speculative bet for the users, rather than a way to gain profits. After all, before the options expire, users may lose all of their assets.
Charm Options charges 1% of the underlying transaction fee to open a position. Options can be sold at any time prior to the expiration date and positions can be closed or settled without a fee. The price of the platform’s options is completely determined by supply and demand, and AMM does not rely on external forecasts for pricing, and the main principle behind this mechanism is LS-LMSR cost function (LMSR is sensitive to liquidity).
PlotX: Focusing on Crypto, with IDO Price Prediction
Background and Introduction
The biggest difference between PlotX, which was launched in October 2020, and other platforms, is that PlotX focuses on the prediction market related to encrypted currencies. On May 14, 2021, PlotX v2 was launched on the Polygon network.
The PlotX platform is similar to PolyMarket in that it uses a one-click login with Magic Mailbox; the difference is that PlotX’s prediction event cycle is short, and only supports the time limit of 1 hour, 1 day and 1 week, which improves the efficiency of capital utilization to a certain extent. The platform token is PLOT, and users need to hold PLOT to start predictive betting. The deposit process (cross-chain bridge or cross-chain Swap essentially) allows users to transfer $PLOT tokens from Ethereum or Polygon network to a PlotX-connected Web3 wallet, which has been tested to work smoothly.
PlotX v2 introduces meta transactions, which means that once a user’s Web3 wallet is connected to PlotX, they don’t need to pay any gas fees. This is because the v2 smart contract extracts gas from the users and makes it part of the prediction fee. At the same time, the initial liquidity guarantee is provided by forcing the market creator to make a first forecast for each of its options at the time of creation of the markets. Previously, PlotX officially announced that they would add a new value-discovery market for newly launched tokens, but it is still in beta testing, and is worth looking forward to.
Polars: Markets in Turn, and Opportunities for Arbitrage
Background and Introduction
Polars is a multi-chain prediction platform with a core team of experienced business and market-making teams from 1marketmakers.com. Beta testing of the smart contract has recently begun on the Ethereum “Rinkeby” testnet. The product already supported Ethereum, Polkadot, and BSC and will be deployed on all EVM-compatible public chains in the future.
The first opposing teams on the Polars platform are the white team and the black team. Each team has its own token with the same name — a BLACK and a WHITE token. If the white team wins, the price of the white token for the white team goes up and the price of the black token for the black team goes down. But the sum of their currency combinations remains the same. If the black team wins, the black team’s token price goes up and the white team’s token price goes down. Wins and losses are influenced by the results of external events of the real world (exchange rates, sports events results, political events, etc.). Each day, the price of a particular pair of Polar Tokens is constantly affected by 5 to 15 events, but their total sum prices remain the same. Users bet on the outcome of the events by purchasing tokens for the respective team, while being able to create their own marketplace on the Polars platform. The Polars is designed to have both a POL staking pool and a liquidity pool with no slippage for each event, allowing traders/bettors, LPs, arbitrageurs, creators and POL token holders all to profit in different ways. The platform will return 30% of the cost to high-quality users, 20% back to the Base Pool, and 50% to the LPs.
Hedgehog: The Super Star of Solana Network
Background and Introduction
Hedgehog is the first decentralized prediction platform based on Solana, which was officially launched in April 2021. At the beginning of May 2021, Solana’s ecology once gained a very high market influence, as the high speed and low gas fees allowed Hedgehog to quickly develop its own market.
Hedgehog has now opened up the Devnet beta for users to participate in via sHOG, a stable currency on the Devnet. It is important to note that Devnet tokens are for testing purposes only and have no real value. From the product design perspective, users can experience as Trader or LP(Liquidity providers): Traders select the (prediction) events to be traded and can click to join, with “Yes” and “No” two options of Shares and the combined price of the two options is $1.00. The intuitive experience of the product can be viewed as “PolyMarket of Solana Network”. The Trader can purchase a certain number of sHOGs for a certain option and try to enter different amounts to observe the dynamic changes of the trading indicators. LPs provide liquidity to the market, enabling traders to trade with “Yes” and “No” options. All of these actions require the approval of the transaction in the Solana Wallet. The Hedgehog team also launched a competition and Leaderboard ROI ranking to encourage user participation. According to the official statement, LPs will be rewarded from Trader’s transaction fees after the mainnet launched and will be extended to other ecological chains in the future.
An Overview of Mainstream DPM protocols
To get a better sense of the differentiated characteristics of various prediction market protocols (and to save your time reading this article), our research team has put together a comparison chart. Relevant data and features are as of July 5, 2021 without including any unconfirmed product.
III Innovations in DPMs
Many forerunners of prediction markets have fully realized the core position of liquidity. After all, many early markets were created without Bettors’ participation and quickly vanished. Therefore, attracting and retaining users are very critical for such an “intriguing” field. To this point, different protocols have made different efforts: tokens created on Omen support DEX transactions, and in the future, the interoperability between different DPM such as Omen and Polymarket can be achieved as well; PlotX v2 has set up “soft start” from the mechanism, and the new version rules change to that the event creator must predict each new event for the first time, which can guarantee the initial liquidity; Polars not only has the pledge pool of POL, but also has the non-slippery liquidity pool of each event, so that Traders/Bettors, LP, arbitrageurs, creators and POL token holders can make profits in different forms, while the platform will return 30% of the fees to high-quality users, 20% to the Base Pool; 50% to LP; Hedgehog has not yet launched on the mainnet. The effect of the “hero list” incentive method is unknown, but it is also an attempt.
Increasing the Utilization of Funds
Last year, the DeFi wave just began, and many professionals discussed the utilization rate of funds. Although the prediction market track is emerging, spending more than 1k USD to bet a result, no matter in a bullish or bearish market, can be mentally discomforting for daily users. On the other hand, if the investment is too small, users would find it to be unnecessary. After all, big prediction protocols such as PolyMarket and Omen concern events that will happen months later. In the crypto world, this time cost is too high. This is why PlotX v2 shortens the period for which events are predicted, limiting the creator’s choices to 1 hour, 1 day, and 1 week for expiration. In this way, participants do not have to lock up a large sum of money for several months each time, and the participating threshold is greatly reduced. How to improve the efficiency of funds while maintaining a pleasant degree of participation? This is the problem to be solved in the next stage of the prediction market protocols.
Choosing Topic Scales
“Big and broad” or “small and specific?” Big protocols like Omen and PolyMarket have chosen to cast a wide net, covering topics from presidential elections to the recent epidemic, from the European Cup to Bitcoin, and in the hope of retaining all the people who click on the site. The new challenger, PlotX, is only looking at enthusiastic gamblers in the cryptocurrency space. In its early stage, the project took advantage of the heat of DOGE and did aggressive marketing, and is preparing to launch on SOL; recently, it launched a Pre/Post-IDO token price prediction, which is unique in the market. Covering “small and specific” topics has the advantage of its own, while covering “big and broad” topics is good for risk-shifting. In the end, it all comes down to user participation. Bettors, after all, play a zero-sum game. The more the participation, the bigger the winner’s prize pool.
Prediction markets can be regarded as an information market, which is almost the most essential reason for its existence. The on-chain information market needs to reflect its essential value through asset liquidity and user participation, and the larger the number of users and the capital precipitation, the higher information density and accuracy. This is reflected in the fact that users with different backgrounds have different sourcing channels and varying interpretation ability.
However, as shown in this article, although there are many on-chain prediction protocols, the overall amount of funds and user participation are still small compared with the tracks such as lending and DEX. We believe that one of the reasons is that the number of on-chain users is still small, and the users’ backgrounds are not as scattered as the traditional prediction market and cannot really reflect the prediction market value. At the same time, we believe that the interoperability between the on-chain protocols is very strong, as demonstrated by the convergence of asset prices between DEX through arbitrage robots and the connection between lending and DEX through liquidation and flashloan, etc; however, the correlation among different prediction protocols and between prediction protocols and other protocols on the chain is small, showing the phenomenon of “liquidity islands”. However, considering that the combination of prediction and derivatives is beginning to take shape, and some underlying logic of the protocols also supports cross-platform interoperability, we should continue to expect more surprises from the innovative market.